Canada is rolling out new policies to help its highly indebted households support soft demand for new housing. Earlier today, the Government of Canada (GoC) announced new measures to increase the amount of capital used to buy new homes. New home sales have been weak at these prices, and rather than letting prices fall, it appears policymakers have concocted a scheme to make the higher prices more “affordable.” Not just by increasing the amount of debt households can carry, but they’re also encouraging first-time buyer’s to divert more money from the country’s capital markets and put it towards housing.
Canada To “Help” First-Time Home Buyers To Pay Higher Prices
Canadian finance minister Chrystia Freeland announced new measures to help with “affordability.” Starting August 1st, mortgage lenders can start offering 30-year amortizations to first-time home buyers. These loans will be restricted to new construction.
In addition, Canada will also dramatically raise RRSP withdrawal limits. First-time buyers will see the amount they can withdraw for a down payment increase to $60,000. That’s double the current limit in place.
Canada Is Really Just Bailing Out Developers With Soft Home Sales
The measures are being sold as an affordability scheme, but appear to be a developer bailout. Recent new construction demand has been soft at the current prices, meaning incoming price cuts need to be made in order to keep inventory moving. As a result, developers are looking to minimize exposure to any potential price declines by pausing or reducing new projects.
Rather than prices coming down, they want first-time buyers to be able to pay more over a longer period. Extending amortizations from 25 to 30 years allows a borrower to qualify for a loan about 7% larger, at the expense of more interest over a longer period.
Canada Says Improving Affordability. Central Banks Call It Stimulus
Measures like those introduced today are called “demand inducement” schemes. They’re exactly as they sound—a way to get more people to purchase something. They usually involve expanding debt service capacity or diverting capital from “less important” areas to help stabilize prices. The US deployed similar strategies after the Dot Com bubble, resulting in the 2006 Housing Bubble.
It’s an odd sales pitch, since virtually no data agrees with it. The increased amortization has a similar impact to lowering interest rates, allowing borrowers to qualify for larger loans. Bank of Canada (BoC) researchers have demonstrated that only lowering carrying costs doesn’t improve affordability. It produced the opposite effect, actually driving home prices higher over the past 30 years as the increased credit capacity is absorbed by home prices.
Productive investment isn’t flowing into markets as a result of more and more investment being sunk into housing. Canada isn’t just encouraging people to sink more money into housing, but also wants people to take more capital out of their RRSPs. The country is doubling down on the transfer of money from capital markets to non-productive shelter investment.
TORONTO – One expert predicts Ottawa‘s changes to mortgage rules will help spur demand among potential homebuyers but says policies aimed at driving new supply are needed to address the “core issues” facing the market.
The federal government’s changes, set to come into force mid-December, include a higher price cap for insured mortgages to allow more people to qualify for a mortgage with less than a 20 per cent down payment.
The government will also expand its 30-year mortgage amortization to include first-time homebuyers buying any type of home, as well as anybody buying a newly built home.
CIBC Capital Markets deputy chief economist Benjamin Tal calls it a “significant” move likely to accelerate the recovery of the housing market, a process already underway as interest rates have begun to fall.
However, he says in a note that policymakers should aim to “prevent that from becoming too much of a good thing” through policies geared toward the supply side.
Tal says the main issue is the lack of supply available to respond to Canada’s rapidly increasing population, particularly in major cities.
This report by The Canadian Press was first published Sept. 17,2024.
OTTAWA – The Canadian Real Estate Association says the number of homes sold in August fell compared with a year ago as the market remained largely stuck in a holding pattern despite borrowing costs beginning to come down.
The association says the number of homes sold in August fell 2.1 per cent compared with the same month last year.
On a seasonally adjusted month-over-month basis, national home sales edged up 1.3 per cent from July.
CREA senior economist Shaun Cathcart says that with forecasts of lower interest rates throughout the rest of this year and into 2025, “it makes sense that prospective buyers might continue to hold off for improved affordability, especially since prices are still well behaved in most of the country.”
The national average sale price for August amounted to $649,100, a 0.1 per cent increase compared with a year earlier.
The number of newly listed properties was up 1.1 per cent month-over-month.
This report by The Canadian Press was first published Sept. 16, 2024.
MONTREAL – Two Quebec real estate brokers are facing fines and years-long suspensions for submitting bogus offers on homes to drive up prices during the COVID-19 pandemic.
Christine Girouard has been suspended for 14 years and her business partner, Jonathan Dauphinais-Fortin, has been suspended for nine years after Quebec’s authority of real estate brokerage found they used fake bids to get buyers to raise their offers.
Girouard is a well-known broker who previously starred on a Quebec reality show that follows top real estate agents in the province.
She is facing a fine of $50,000, while Dauphinais-Fortin has been fined $10,000.
The two brokers were suspended in May 2023 after La Presse published an article about their practices.
One buyer ended up paying $40,000 more than his initial offer in 2022 after Girouard and Dauphinais-Fortin concocted a second bid on the house he wanted to buy.
This report by The Canadian Press was first published Sept. 11, 2024.
